Category: Investing

When you begin working as a teaching professional, your school district will likely offer you an opportunity to save for retirement, known as a 403b Retirement Plan.

What you might not know is that you can shop around for your plan, just like any other shopping trip. Think of it this way: A little retail therapy can improve mood, boost confidence, and relieve stress, so shopping for a 403b retirement plan shouldn’t be different. You may be surprised at the release of endorphins you get when you ultimately choose a low-fee, tax deferred retirement plan! However, before you begin your shopping experience, get to know the options on the shelf; there are a lot of choices, some with missing price tags and others with confusing language and offers. It can be overwhelming, and you may opt for a word-of-mouth recommendation without knowing the facts, that ends up reducing your nest egg in the future. But by making an informed choice, you can get the satisfaction from the sale, and take control of your financial future.

So, grab your bag, and let’s explore the 403(b) marketplace. Read on for super shopper tips that could potentially set you on track for higher returns and higher security in later years. If you get overwhelmed, don’t just close your eyes and grab the same product your friend chooses. Always seek out professional guidance and do your homework in comparing the products, because here, it’s the savvy shopper that earns the deal!

Shopper Tip #1: Find your TPA

If OMNI is your TPA, visit www.omni403b.com: • Click on the ‘Participants’ button. • In the bottom left corner find where it says Employer Plan Info and then select your state. • Type in your employer name and select it. • Click submit. BOOM! You just found your menu of participating providers!

Step #1 – Finding Your TPA ( 403b Marketplace )

Where to start? Imagine the TPA as your mall with a map of all the shops—or providers—that your district has made available to you.

A TPA (Third Party Administrator) aggregates the 403b plan provider choices for the district clients, much like a mall that has a variety of stores for you to shop in.

OMNI is one of the largest TPAs that organizes 403(b) options for teaching professionals. It provides a site in which to manage the initial designations you’ll make when you sign up for an account. New York and some other states use OMNI. As a client, you will go to the OMNI site to set up your account.

Step #2 – Compare Providers

Once you find your TPA (403b marketplace) you can look at the list of participating providers your district has made available to you.

Neither your school district, nor TPA, can tell you which provider to use. You must comparison shop on your own. Just as a mall contains stores, but doesn’t tell you which to go into, OMNI does the same. OMNI is a TPA that prides itself on the variety of providers it offers and can have over twenty in one district.

There are names you might recognize from ads or from friends who’ve invested, and some you don’t. These are some of the companies you may see on the list: AXA, Voya, Metlife, Vanguard, FTJ Fundchoice, Aspire Financial and Fidelity.

Do bigger brands or recognizable names mean better quality products? Not necessarily. You may be surprised to know that many of the recognizable names might be the ones with the least amount of savings.

The important thing to takeaway here is there are two main types of providers –

Insurance companies offering annuities.

Custodial retirement accounts offering mutual funds.

Now let’s talk products!

Step #3 – Compare Products

Shopper Tip #3 – Don’t Be PressuredDo not just choose a product because the salesman bought you lunch at the teacher’s lounge. As with any purchase, be wary of relentless sales pitches that pressure you into buying a product quickly or a deal that seems too good to be true.

After you have perused the menu of providers, you should brush up on what kind of products they offer. Putting in the research and work now will reap better rewards in the years to come. Remember, like anything else, the product choices are NOT equal, and this is not one size fits all. If you aren’t sure, consider consulting an independent financial professional —aka “personal shopper” to help you weed through the racks.

There are two main types of 403(b) products available for you to consider.

MUTUAL FUNDS (also called a 403(b)(7) custodial account): This type of product allows participants to invest their contributions in mutual funds. The account is not an annuity or a life insurance product. Returns on contributions depend on the performance of the mutual funds selected.

ANNUITIES:
An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. You buy an annuity either with a single payment or a series of payments called premiums.Annuities are often marketed as tax-deferred savings products and come with a variety of fees and expenses, such as surrender charges, mortality and expense risk charges and administrative fees. Annuities also can have high commissions, reaching seven percent or more. These are the three common annuity products:

Variable Annuity Product

A variable annuity is a contract with an insurance company under which you contribute into a tax–deferred account. In return, the insurer agrees to make periodic payments at retirement or some future date. You can choose to invest contributions in a range of investment options, which are typically mutual funds. The value of the account in a variable annuity will vary, depending on the performance of the investment options chosen. In this sense, it is similar to a mutual fund product except it is offered as a life insurance product and involves a contractual agreement.

Fixed Annuity Product

A fixed annuity is a contract with an insurance company that guarantees a minimum rate of return during the time that your account is growing. The insurance company also guarantees that the periodic payments in retirement are guaranteed for an established amount of time. Details of the minimum rate of return and payout schedule are established when the contract is signed. In some instances, the insurance company will charge additional fees for features and guarantees.

Equity Indexed Annuity Product

A specific type of fixed annuity contract between you and the insurance company. During the period of time where you make contributions, the insurance company credits a return that is based on changes in an equity index, such as the S&P 500 index. The insurance company sometimes also guarantees a minimum rate of return. In retirement or on a future date, the insurance company will make periodic payments to you under the terms of your contract. In some instances, insurance companies will charge additional fees for features and guarantees.

Before you commit to a product, ask yourself some of these general questions:

What is the difference between investing in an annuity versus a mutual fund?

Are you aware of all the fees or commission involved, including all costs of mutual funds or variable annuity sub accounts?

Do you know how you your financial advisor and the investment company you’re working with are being compensated?

Does your financial advisor accept fiduciary responsibility?

Are my investments being monitored by my financial advisor or someone else?

You are so close — but wait, did you take a closer look at the price tag? Before you hit the register, you must determine what it will cost to invest in your future. And it’s not always easy uncover what your future costs will be, especially when fees can be hard to find.

You can’t escape investment fees. The average mutual fund fees and expense ratio is 1.02% a year, according to the Investment Company Institute. On the other hand, the annual fees on variable annuities usually start at 2% and vary up to 3%, according to FINRA. And that’s in addition to the fees that are charged by that product’s mutual funds that make up your sub-accounts.

If you can’t picture that in terms of how much the fees are costing you, consider this example: Jane Smart decides to invest in a variable annuity with a 2.25% fee cost. She contributes $250 steadily for over 35 years, with an 8% average of annual return. Upon retirement, Jane has built a nest egg of $336,320. Jane is happy. But look at the numbers closer — had Jane shopped around and done her research at the time of purchase, she would have found lower cost plans that would have lower fees. If Jane had chosen a 1.40% fee plan with the same average of annual return, she would have $73,265 more in her savings. The moral of this story? Do your homework!

Get out your magnifying glass and ask to see the prospectus or contract. All mutual funds and variable annuities are required to produce a document called a prospectus, which details specific information about investment cost, objective, risk, performance, and operating rules. Fixed-annuity products do not have a prospectus. Instead, they have a contract that details operation of the annuity. If you can’t make heads or tails of it then ask an independent financial professional before you sign on the dotted line.

It is important to understand all fees associated with your plan before you begin contributing to any 403(b) investments. Additionally, some investments impose surrender charges or restrictions on withdrawals.

Shopping tip #5: Buyers Remorse? Did you already choose a plan but now have buyer’s remorse? Don’t worry, just like shopping, there is the possibility to exchange a product. You will need to determine if there are any surrender charges or fees before doing so.

Once you have done your research, selected a provider, and shopped a plan—the smart way—you can begin contributing a part of your paycheck to start your nest egg. You can access a Salary Reduction Agreement through your TPA. No amount is too small, and the fact is, you are doing something great for your future by making savings a priority.

Because the income funneled into your account is tax-deferred, the IRS does set a capped amount for 403b contributions each year. There are other options for increased savings though, based on age and employment. If you can, go ahead, and max out your savings! What you do now will have higher payoff in the future.

If Shopping Isn’t Your Thing, Don’t Go It Alone!

Everyone knows, shopping is much better with a friend! Going alone can be time-consuming, sometimes confusing, and what’s more, the mistakes can be costly. Working with a financial advisor (aka personal shopper) is an option to consider carefully. If you have any questions, we are here to help.

Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. They are not suitable for all investors. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value. Equity Indexed Annuities permit investors to participate in only a stated percentage of an increase in an index (participation rate) and may impose a maximum annual account value percentage increase. EIAs typically do not allow for participation in dividends accumulated on the securities represented by the index.

Warwick Valley Financial Advisors and LPL Financial are not affiliated with any of the other referenced entities.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice.

Ask Questions, Save Money When It Comes to Your 403(b)

Let’s be honest. Life is busy. Sometimes even knowing what types of retirement options are available to you—or even which ones you have–is difficult enough, without allocating the time to really understand each. Perhaps all too often, things are left to auto-pilot when it comes to paycheck designations – you opt-in because you can. But in the case of teacher’s 403(b) retirement plans, brushing up on the specifics of yours may be well worth your effort. In fact, it can potentially gain you thousands more in the long run – and really takes little more than just some smart homework. So…. let’s start with the very basics, and get you on track to maximize the money you’re striving to sock away for later, or at the very least, to become aware of the power you hold toward such noble pursuits in the future.

Retirement 101:

403(b) Vocab Terms for Teachers:

Tax-Deferred

Money that comes out of your paycheck and which is automatically invested into an account which is not reportable as income now, but will be when paid out during retirement.

Annuity

A contracted account offered by an insurance company where a lump sum of money is deposited for the purpose of being paid out at a later date, in either equal installments or in proportion to how well it accumulates with investment strategies applied over time.

Provider

Either an insurance company, an investment firm or a retirement account custodian that offers 403(b) plan options to employers. These vendors choose portfolios to invest the money in to hopefully increasing its principal value over time and setting plan rules, regulations and annual fees.

403b Plan Products

Accounts set up by Providers that are meant to take in money now from clients and pay it back out to them later in installments as a means of seeking to establish a retirement “income,” after it has been invested toward growth over time in such things as stocks and mutual funds, etc. Examples include annuities, mutual fund retirement accounts, and combination programs.

What IS a 403(b) plan?
A 403(b) is a retirement savings program much like a 401k, but has special allowances tailored specifically to the teaching profession and a few others (because they have certain exemptions as public educational institutions, not-for-profits or as certain types of churches). When you work as a teacher, it is likely your school district employer will offer you the opportunity to contribute to a 403(b), helping you save for retirement, reducing your taxable income, potentially matching your funds (if you’re lucky enough to have an employer choosing to offer this) and in many cases, allowing you to decide your amount of contribution up to a maximum set by the IRS. What makes a 403(b) special is that you do not need to pay taxes on the money contributed into the account now (it’s tax-deferred). When the money begins to produce regular pay outs in the future, assumably at the time of retirement, you will then be taxed on it as regular income–but as a retiree and typically at a lower rate.

Do I have one?
If you work as a teacher, chances are you have had the opportunity to enroll in your district’s plan, or one of the plans they offer if multiple. But just because your employer has chosen a plan for you and you’ve opted in with reductions from your paychecks, it doesn’t necessarily mean these work best for you as is. In fact, it may not, as employers choose plans for a variety of reasons supporting their best interests—and these may not necessarily mesh with yours. This doesn’t always mean you’re locked into their default settings; sometimes switching to another “provider” for your plan (plans are set up for employers by different vendors) is allowed–and can help you to pursue optimal dollars for the future, once able to properly compare alternatives and their different offerings. Similarly, sometimes you can change some of the options within your plan. You’re already doing the hard work daily. Why not reap the most reward that is in essence, your earned cash?

What are some common types of 403(b)’s?
403(b) plans can either place your pre-tax investment dollars into annuities or mutual funds so they hopefully will grow over time. Such investments are chosen and managed by the vendor which provides your employer’s plan, and which manages the portfolio therein; diversifying investments based on what they feel will serve best for their clients, ensuring, in theory, good growth over time and reasonably low risk, and the benefit of relatively safe, low-maintenance investing.

Who are some 403(b) Providers?
Simply put, providers can be institutions like insurance companies, investment firms that run mutual funds or retirement account custodians that set up diversified 403(b) plan products and offer them to employers. These providers set up rules for the plan including minimum contributions, possible commissions for their investing services, time before payout is available without penalty, annual and other fees, if there might be a Roth 403b feature (look out for our future post explaining this type of offering), etc., and they pick investment portfolios in which to hopefully grow your money while it “sits.” Examples are financially savvy companies like Fidelity, Vanguard, FTJ Fundchoice and Aspire Financial.

BUT, while 403(b) individual terms and conditions are necessary, and important components of a plan…. these are factors you should ALWAYS check into! Here’s why:

Providers are not equal.Although your employer chooses a provider for your 403(b) as previously mentioned, ranging from insurance companies offering annuities to financial institutions managing mutual funds to combination accounts, some districts allow you to override this choice and pick your own; some do not. Finding out what your specific circumstance is can be accomplished by asking a simple question of HR, and then doing some minimal research on the benefits of each of the alternative providers and what they offer, if you’re allowed a choice. Everyone has different investment strategies and goals, so it is important to make sure you are reasonably informed about where your money is going and why. We’ve found that many teachers that come to us have typically been invested in annuities and don’t have any idea about how much has been vested in these to date, or how their money is being managed within the constructs of their plan. It is a good idea to check into how experienced the investors running your plan’s portfolio are, and what their reputation is.

“Often times, clients come to us with 403(b) accounts that are annuities. These may contain fees for features you may not even need or want – depleting your future nest egg as they add up over years. Sometimes, it takes little more than some polite inquiring to identify these and potentially do something about them.”

403b plans and specifically, annuities, often have hidden fees written in.
This is certainly not uncommon. It takes but a simple but carefully-worded letter (see our post Do You Know How Much You Are Paying in Retirement Fees?) to identify if and what extraneous fees exist in your plan, if they are warranted for your goals and circumstances or should they be unnecessary for you – and believe it or not, this is often the case! Of further note, different providers have different operating rules and investment objectives which can vary greatly among product vendors and across investments. Some accounts impose surrender charges or restrictions on early withdrawals. It can be very useful to know what yours are now, should you feel they are not in line with what your needs or desires might be in the future. Additionally, some vendors impose commission fees on investment earnings, and some do not or have lower ones. Imagine! You could spend years contributing to a plan that may not serve you in the long run, or paying portions of your earnings for things that don’t apply to you or that you really don’t need–and which you can very simply, opt out of, or not be charged for in a different plan. These things add up and detract from the money you get when you retire, compounded monthly… over years into what can be quite a large sum of money by the time you reach withdrawal age! This is why it is important you find out as much as you can about the specific 403(b) you have and make a few smart decisions now. Examples include, discerning and choosing between different types of annuities that may carry varying degrees of risk, or, changing from a plan that owns multiple mutual funds requiring additional fees – to one that avoids these in its portfolio if preferable.

“It is possible to be invested in a minimally advantageous 403(b) plan, with among potential negatives exorbitant fees, unreasonable commissions that are being charged on your gains, penalties for making changes, or even fund investments that the vendor is being paid to make over others. In fact, sometimes a Provider might push its lead product to districts over its best product because it will benefit their own bottom line.”

It’s worth the effort.Studying up on different types of providers can be an annoyance, but is also relatively easy and can be followed up by educating yourself on what questions to ask while you compare potential plans. Look for
future posts here, like What Questions to Ask When You Compare 403b Providers and What to Do if You’re Unhappy with Your 403b Provider. Should you need help weeding through that jungle, or if you simply would rather have someone do the work for you, we are here to help and are already familiar with the different common area providers and their plans.

403(b)s can be self-directed investing.
While most people are happy to let their provider manage their money and investments once contributed to the 403(b), it is important to understand that in some cases, you can as well take a more active role in choosing exactly what mutual funds your money goes in to. If one is more comfortable with high risk, or has a good grasp of the market and investments, this might be something to consider if an available option for you. Either way, understanding that 403(b)s can be self-directed is an important fact to keep in mind over the term of your investing.

Don’t Settle for Less–Pursue That Potentially Higher Return on Investment!

Don’t let ignorance or a busy lifestyle stand in the way of protecting your future. You know what they say – an ounce of prevention is worth a pound of cure! Now that you’ve read up on 403(b)’s, it’s time to take some action and do a little hand raising yourself! Once you’ve garnered some basic information about what type of account you have, and what type of fees you might be paying, you can take steps to better secure your financial situation should it be warranted. And we are here to help.

Don’t Want to Go It Alone or Need Some Help? We’re Here.

Please know that if you have any questions along your journey or if you’d like some advice or expert assistance, or even for us to do the hard work for you, we’re available to assist. Give a call to our office at (845) 981-7300 today or continue consulting our blog and future posts on this important topic, and empower yourself to take actions in your best interest toward the future you deserve. Good luck!

Investing involves risks, including the loss of principal.

Fixed and variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

This communication is strictly intended for individuals residing in the state(s) of CT, FL, MA, NJ, NY and TN. No offers may be made or accepted from any resident outside the specific states referenced.